At a time when several of the world’s largest economies are in danger of falling into recession, China’s “disappointment” with 9.1 percent growth for the third quarter may seem disingenuous. Yet not only was the actual result lower than expected, it also marked the fourth straight quarter of declining growth in what has become a worrying trend.
It may well be that China’s days of double-digit growth are behind it. Economic forces are pushing it to undertake a tricky balancing act between job growth and inflation as it tries to transition from a developing nation into a world-class modern one.
China surpassed Japan earlier this year to become the world’s second-largest economy behind the United States. Nevertheless, from a development standpoint, China is still in its infancy. It has been less than 50 years since China first dabbled in its unique brand of state-sponsored capitalism as a way to transform itself from an agriculture-based society.
Thanks to its massive population (and therefore cheap labor supply), China has managed to position itself as a low-cost manufacturing center and supplier to the world’s most important markets. The formula has been wildly successful and last year, China overtook Germany to become the largest exporter on the planet. China realized more than $1.6 trillion in foreign export sales for 2010, according to the CIA World Fact Book. Roughly half of China’s total exports that year went to either the US or the European market.
Critics have long pointed to China’s reliance on export sales as a risk to its economy. The ongoing debt crisis in Europe and even the reduced outlook for growth in the US show how events in other countries could also affect China. If key markets cut back on purchasing its goods, it could trigger a “crash” in China.
Beijing has made a huge effort to create additional markets for its products to create a more balanced economy. Besides enlisting other Asian nations as customers, the regime is also developing a more robust domestic consumer market to help lessen its dependency on the export sector. Within the span of the last two generations, a new working class with disposable income has emerged. Yet millions of people still live in poverty and the more remote areas of the country are excluded from the boom.
Moving these people into the modern economy and making them consumers could drive domestic growth for years. But that means continuing to create millions of new jobs every year. Economic forces may be catching up with Beijing’s ambitious plans.
The simple truth is that no economy can experience years of double-digit growth without inflation rearing its head. pushing prices higher. When wage hikes stay in line with price increases, the impact of inflation is felt mostly by the unemployed. However, in recent years, the price of food and other important staples has risen much faster than wages and all but the wealthy are feeling squeezed by the rapidly climbing cost of living in China.
These latest developments have forced authorities to implement a series of measures to slow the rate of inflation. For example, the government has implemented new regulations restricting speculation in the property market and reducing liquidity by increasing mandatory bank reserves. The People’s Bank of China has even introduced a series of interest rate hikes. These moves in turn have slowed job growth.
When export sales declined during the last recession, Beijing resorted to stimulus spending to keep jobs from disappearing. More of this may be necessary in the future, and with an estimated $3.2 trillion in total currency reserves, the government can well afford it. But the economy can’t defy economic gravity forever.
So China’s future policies will have to negotiate the balance between supporting healthy, robust job growth while keeping inflation capped at an acceptable level. It’s a monumental task. As a result, some insiders predict that the days of 10 percent plus annual growth are a thing of the past and a more reserved pace of growth is likely.
In the long term, all signs point to China continuing to expand at a faster rate than the western economies, but it undoubtedly will suffer its share of ups and downs.